Investors should position themselves for pleasant surprises

Adriaan Pask

Adriaan Pask, CIO at PSG Wealth, explores how 2024’s market milestones are likely to impact the year ahead for investors

As we reflect on 2024 and look toward 2025, one thing is clear: despite global and local challenges, South African investors have reason to be optimistic. Market conditions have shown significant improvements, particularly in key asset classes such as bonds and property. Economic indicators suggest a more favourable climate ahead, provided investors remain strategically positioned and maintain a well-diversified approach.

Despite initial concerns about inflation and interest rates, South Africa's markets demonstrated resilience in 2024. Local bonds outperformed expectations, proving to be one of the strongest asset classes of the year, while the property sector experienced a notable resurgence. Lower interest rates and higher long-term bond yields created attractive property deals, which in turn led to capital appreciation.

While South African equities did not match the stellar performance of US equities, they still fared well given the political and economic landscape. The ability to generate strong returns in a diversified portfolio was evident, reinforcing the importance of balance in investment strategies.

Shifting global market dynamics

Investors often compare their portfolios to the S&P 500, yet the sustainability of US equity valuations remains a concern. The concentration risk in the US stock market, particularly within the "Magnificent Seven," raises questions about potential corrections. Moreover, US debt levels and high borrowing costs present a growing challenge. Although US markets have been robust, investors should be cautious about their long-term trajectory.

Conversely, local asset classes have been re-rated, with prices increasing, and there is still significant potential for strong performance. Yields on corporate and government bonds, as well as listed property, remain above historical norms, offering promising opportunities. The inflation outlook in South Africa is also encouraging, currently sitting near the lower end of the target range. This provides the Monetary Policy Committee with room to foster economic growth while improving investor sentiment both locally and in emerging markets.

The state of SA’s economy

One of the biggest positive surprises of 2024 was the improvements at Eskom and Transnet. South Africa went over 300 days without load shedding, a scenario few would have believed possible just 12 months ago. Transnet, too, has taken critical steps to enhance efficiency, with clearer strategies and incremental progress evident.

These structural improvements have bolstered investor confidence. Historically, poor sentiment surrounding infrastructure and governance issues has weighed down valuations. The shift towards tangible progress is a game changer, making South Africa more attractive to both local and foreign investors.

The formation of the Government of National Unity (GNU) has also introduced a more balanced and rational decision-making process, which has encouraged a more measured approach to policy implementation. The impact of these structural shifts is already being felt, as capital begins to flow back into South African markets, further supporting economic recovery.

SA’s relative advantage must translate into sustained confidence

While there are many reasons for optimism, it is essential to acknowledge potential risks. The global economic environment remains uncertain, particularly with the potential for a slowdown in the US. A weaker US economy is often viewed negatively, but from a South African portfolio perspective, it could offer relative advantages given current market positioning.

One of the key risks is the trajectory of US interest rates. Higher rates have begun to strain corporate and consumer balance sheets, leading to rising bankruptcy numbers. Additionally, a significant portion of US debt, issued at historically low interest rates, will need to be refinanced at much higher levels in the coming years. This could create financial stress, particularly if inflationary pressures resurface. Political dynamics, particularly following the US elections, could further complicate matters, with potential tensions between the presidency and the Federal Reserve over monetary policy.

China’s economy also presents an area of uncertainty. While it has the potential to surprise positively, ongoing struggles in the real estate sector and broader economic fragilities remain a concern. Europe, too, finds itself in a challenging position, with investors focusing more on perceived risks than on attractive valuations.

For South Africa, the outlook hinges on continued structural improvements and economic policy execution. Inflation trends are also crucial – lower inflation, coupled with stronger nominal growth, could result in a positive economic surprise in 2025. However, these improvements must translate into tangible outcomes to sustain investor confidence.

Tactical diversification for long-term gain in 2025

As we move into 2025, investors must adopt a balanced and strategic approach. One of the key considerations is the role of the US dollar. The dollar does not currently reflect the fiscal challenges the US faces, and markets will need to reassess this dynamic in the months ahead.

From a broader investment perspective, maintaining a positive outlook is essential. Many asset classes, both locally and globally, are yielding well above their long-term norms. While the potential for a US recession and a sell-off in the S&P 500 is a concern, it could also present opportunities. Periods of market volatility often create the best buying opportunities for quality assets, allowing investors to strengthen their portfolios for long-term gains.

Diversification remains a crucial principle, but it must be implemented strategically. Investors should not simply spread risk across multiple assets without considering potential returns. A tactical approach – identifying undervalued opportunities and maintaining exposure to high-quality assets – is key to maximising long-term growth.

Investors should position themselves for pleasant surprises

South Africa enters 2025 in a significantly stronger position than many expected. The combination of structural improvements, favourable inflation trends, and improving investor sentiment creates a compelling investment landscape. While global risks remain, the potential for upside surprises is equally strong.

As always, the key to navigating market uncertainties lies in maintaining a well-diversified and strategically positioned portfolio. Investors should remain open to opportunities, particularly in areas where valuations appear attractive despite perceived risks. With careful positioning, 2025 could be another year of strong investment performance for those willing to take a long-term perspective.